Monetary policies may need to be "more accommodative than otherwise" in the wake of financial crises that impair a central bank's ability to nurture the real economy, an influential US Federal Reserve policymaker argued on Monday. In his first public comments since the Fed last week unveiled a plan for reducing its stimulative asset purchases, New York Fed President William Dudley said the US central bank must consider financial instability when formulating its policies.
Dudley did not comment specifically on the Fed's current policy stance. Instead he spoke more generally about the intersection of financial regulation and monetary policy, and he largely repeated past arguments. "The stance of monetary policy needs to be judged in light of how well the transmission channels of monetary policy are operating," Dudley said according to prepared remarks to the Bank for International Settlements, in Basel.
"When financial instability has disrupted the monetary policy transmission channels, following simple rules based on long-term historical relationships can lead to an inappropriately tight monetary policy." The Fed set off waves of selling in the world's financial markets when Chairman Ben Bernanke said on Wednesday the US central bank expected to reduce its bond-buying later this year and halt the stimulus program altogether by mid-2014 if the economy improves as forecast.
As it stands, the Fed is buying $85 billion in Treasury paper and mortgage-backed securities each month to stimulate investment, hiring and economic growth. Policymakers also mostly expect to keep benchmark interest rates near zero until 2015. Dudley is a close ally of Bernanke and a strong backer of the Fed's unprecedented efforts to accelerate the US recovery from the 2007-2009 financial crisis and recession. His comments gave a brief boost to US bond markets early on Monday, though the price of the benchmark 10-year Treasury note was down again in morning trading.
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